If you’ve ever tried to play bingo, you’ll know that searching through sub-prime rate sheets is a similar experience, albeit less fun.
Rate sheets seem complicated, but the beauty of lenders having their own risk-based categories is that each decides which combination of credit problems fall under which ad-verse level and can price accordingly.
Jackie Bennett, head of policy at the Council of Mortgage Lenders, has declared that the CML hopes to establish a common language for sub-prime mortgages by early 2008.
Its intention is to simplify the labelling of adverse borrowers to make it easier to ensure that these vulnerable cli-ents are treated as fairly as possible. The CML has yet to publish any proposed definitions, but as always the devil is in the detail and it won’t be an easy job.
The temptation will be to define sub-prime borrowers as those who aren’t able to get mainstream mortgages because of past credit conduct.
However, this simplification is not always accurate. Many clients with minor adverse records can be placed with mainstream lenders on the strength of low LTVs and other merits.
This is where advice comes in. Good brokers or packagers will be able to advise what is best for their clients. It also highlights the need for sub-prime panel-only specialists to demonstrate that clients with minimal problems should have access to mainstream propositions.
The CML’s early research appears to be sorted as low, medium and high-risk clients who can be matched to equal products that lenders will price uniformly.
Although this may initially inspire joy among those of us who are tired of wading through the pages of loadings to find the appropriate rates, standard terms could in fact disadvantage clients.
For example, one lender may allow clients with £1,500 of County Court judgements but no mortgage defaults to be eligible for a certain rate.
However, another might allow consumers with missed mortgage payments but only one CCJ to get the same rate, but could charge a higher rate for £1,500 of CCJs because its attitude to risk is different.
If the choice of going with some lenders is closed to borrowers, the products available to them will also be restricted.
I look forward to seeing guidance from the Financial Services Authority on how to treat fairly those customers who have suffered credit problems, specifically for unregulated secured loans and second charges.
Most importantly, it is vital that brokers and lenders are responsible for ensuring that whether formally defined or not, every sub-prime mortgage arranged is done so on the understanding that it is merely the first step in a two or three-year project to repair clients’ credit ratings to the point when they qualify for mainstream products again.
This is where brokers’ relationships with their clients will be key, to ensure they are part of any future remortgages resulting from clients’ improved financial standing.